Question

michael's Inc. just paid $2.75 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.9 percent. If you require a rate of return of 10.1 percent, how much are you willing to pay today to purchase one share of the company's stock?

Answer 1

To calculate the price of the stock, you can use the Dividend Discount Model (DDM) formula. In this case, the price of the stock is $45.78.

Step-by-step explanation:

To calculate how much you are willing to pay today to purchase one share of the company's stock, you need to use the Dividend Discount Model (DDM). The DDM formula is: P = D / (r - g), where P is the price of the stock, D is the dividend, r is the required rate of return, and g is the growth rate of the dividends.

In this case, the annual dividend is $2.75 and the dividend growth rate is 5.9%. The required rate of return is 10.1%. To calculate the price of the stock, plug the values into the formula: P = 2.75 / (0.101 - 0.059) = $45.78.

Therefore, you would be willing to pay $45.78 today to purchase one share of the company's stock.

Answer 2

$69.33

Step-by-step explanation:

Calculation for how much are you willing to pay today to purchase one share of the company's stock

Using this formula

P(0)=[Annual dividend *(Increase in future dividend)]/ (Rate of return- Increase in future dividend)

Let plug in the formula

P(0)=[$2.75*(1+0.059)]/(0.101-0.059)

P(0)=$2.75*1.059/0.042

P(0)=$2.91225/0.042

P(0)=$69.33

Therefore the amount you are willing to pay today to purchase one share of the company's stock will be $69.33